What is the aftertax cost of debt?
Morgantown Tool has 7.5 percent semiannual bonds outstanding that mature in 13 years. The current price quote is 101.3 percent of par and the tax rate is 35 percent. What is the aftertax cost of debt? Answer 4.77 percent 4.96 percent 5.23 percent 5.38 percent
Pretax and aftertax cost of debt?
We are not told a face value, so I will assume a $1000 face value. There are n= 30-7 = 23years to maturity = 46 semiannual periods to maturity Coupon = 7% x 1000 = $70 annually = $35 semi-annually Therefore, set up the value equation 940 = (35/r) ( 1- (1+r)^(-46) ) + [ 1000/ (1+r)^46 ] Guess and chck for values of r. Note: r is a semiannual rate. The bond sells at a discount, so therefore the yield to materity must be less than the coupon rate (i.e. less than 7% / 2 = 3.5% semiannually) . After a while, r= 0.0377694= 3.78% semi-annually = 7.56 // I got a value this precise by just chucking the equation into an online calculator , but you should know how to find solutions to this by guessing and checking. When guessing and checking you only need a value precise to about 2 or decimal places http://www.wolframalpha.com/input/?i=940+%3D+%2835%2Fr%29+%28+1-+%281%2Br%29%5E%28-46%29+%29+%2B+%5B+1000%2F+%281%2Br%29%5E46+%5D+ Therefore A) Pretax cost of debt = 7.56% annually B) After tax cost of debt = 7.56% x (1-0.35) = 4.91% C) After tax cost is more relevant as you need an after tax discount rate to discount after tax cash flows.
How do you Calculate After-tax Cost of Debt?
Calculate the after-tax cost of debt under each of the following conditions: Interest rate, 12 percent; tax rate, 0 percent. Round your answer to two decimal places. Interest rate, 12 percent; tax rate, 20 percent. Round your answer to two decimal places. Interest rate, 12 percent; tax rate, 35 percent. Round your answer to two decimal places.
How to find Pretax and Aftertax Cost of Debt?
Since the bond is selling for a premium, you know that the market rate of the debt is lower than the coupon rate... First solve for the YTM of the bond. 0 = 1100 + 55/(1+IRR/2) + 55/(1+IRR/2)^2 +...+1055/(1+IRR/2)^16, or use a financial calculator or spreadsheet YTM = 9.206357, round to 9.21%
PLease help me! What is the aftertax cost of debt?
Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 13.5 percent, the cost of preferred stock is 6.5 percent, and the cost of debt is 8.2 percent. The relevant tax rate is 35 percent. What is the aftertax cost of debt?
How to find after tax cost of debt?
Micro Spinoffs, Inc., issued 20-year debt a year ago at par value with a coupon rate of 5%, paid annually. Today, the debt is selling at $1,140. If the firm’s tax bracket is 35%, what is its after-tax cost of debt?
The after tax cost of debt on a 9%, $200,000 loan given a 30% tax bracket would be?
The after tax cost of debt on a 9%, $200,000 loan given a 30% tax bracket would be: a) 9.0% b) 6.3% c) 5.0% d) 2.7% Do you know which answer is correct? This is my homework question in finance class and I don't have a clue. Help, help, help.
Why do we use the after tax cost of debt in WACC? Or, put another way, why does the government give tax deductions on interest payment of debt?
When we calculate WACC what we want to calculate is the actual cost of the capital we are employing. To calculate this cost we take cost of each type of capital and calculate the average cost of the whole capital based on the weights which are again decided by the quantum of each type of capital we have.Now coming to the debt part. It is capital employed. Now when we take a debt from anyone in any form whether it be a debenture or a loan we have to pay interest on it.Paying this interest reduces our net profit. Again we also get a reduction in the total income calculated in accordance with the income tax act as this interest is considered as business expense.Now if we have incurred an expense of rs100 as interest then we would account these 100 as an expense. This in return would cause your profit to be reduced by 100 which results inyou not ppaying income tax on that 100.Now as you are saving taxes on rs100 let's say @30% then your total saving would be rs30 due to reduction in profit by 100.So you can consider this rs30 as the amount of income tax you would have had to pay had you not been paying any interest.So the real cost of that debt would be interest - tax savings.So real cost will be 100-30=70Due to this while calculating WACC we consider after tax cost of debts. As having to pay interest on those debts cause you a huge savings in tax and if you had earned that same profit by applying your own money you wouldn't be paying any interest and your cost for income tax would increase.